There is nothing quite like a lack of confidence and aura of uncertainty to slow down market activity. Imminent Elections for the Mayor of London, the fall in the price of oil is affecting global GDP for some key economies whose income rely on it, corrections in the Chinese stock market affecting demand for our exports and the now real possibility that the UK will leave the European Union are all affecting our financial and housing markets. The implementation of an additional 3% stamp duty for second and investment home purchases is imminent and will serve to exacerbate the brakes of demand in the short term despite the continued low cost of borrowing money.
There is no doubt that large financial decisions are being deferred in a similar fashion to that prior to the Scottish in/out referendum and the General Election and demand for new tenancies is subdued as employers pause hiring decisions. Our renewals department has a record number of requests for periodic tenancies where one month’s notice can be given by the tenant to leave the property in the event that their employment situation changes.
It can all go one of three ways
When voters go to the polls on the 23rd of June, there can be one of three outline possibilities:
- The UK remains in the EU. Certainty and confidence are instantly restored and transaction levels to all markets are likely to increase. David Cameron’s four concessions agreed under the UK’s “special status” are implemented including the ability to opt out of deeper integration and an emergency brake on paying early benefits to migrants;
- The UK leaves the EU but not the EEA – like Norway, the UK would negotiate being part of the single market and have to follow the rules of the EU without being part of making those rules. This process could take up to two years to negotiate under an application to withdraw under article 50 of the Lisbon Treaty;
- The UK leaves the EU completely – similar to Switzerland, the UK would seek to isolate itself from the EU and be free to negotiate and control all bilateral trade agreements with other nations. It has been estimated that this process could take up to a decade.
The case for in for the property market
There is no doubt that the least disruptive option is to remain as members of the EU which would mean business as usual from the 24th of June. If our nation chooses to continue with life as we currently know it we expect financial and property markets to resume activity at normal levels and there may even be a surge of activity as a result of pent up “wait and see” demand. This would be a positive for the lettings market and sizeable overseas PRS investors would feel more comfortable
investing in London in particular whilst demand for rental accommodation for staff in the Banks and Insurance Houses will strengthen.
In central London, demand from tenants is driven by employment patterns where renting is the tenure of choice due to lifestyle, not a compromise for people who cannot afford to buy. The Corporation of London has commissioned research that estimates output in the City increasing by a third and employment by 10% in the next decade if we remain in the EU. HSBC recently announced their unanimous board decision to remain headquartered in London rather than Hong Kong which is indicative of London’s strategic importance versus the Chinese territory. Deutsche Bank has said that they would move some of their banking operations out of the UK if it were to leave the EU and more are likely to follow. Standard and Poor’s will almost certainly cut the UK’s credit rating if it looks like UK departure is likely, even before the vote takes place. Manufacturing firms have threatened to leave the UK if it becomes outside the single market and the Bank of England has conducted its own analysis to conclude that, so far, Britain has benefitted economically from EU membership.
We would expect immigration to fall in the immediate term following Brexit and thus there would be a slump in demand for housing. As banks leave the City, so too will their talent of staff who are also some of our most valued tenants. Throughout our 5 offices, 32% of tenants move to London from overseas. This is likely to significantly tail off.
If the UK leaves the EU, the UK could experience between 2 and 10 years of limbo and a probable immediate recession as Government work through the painful process of statutory unravelling and re-stitching as arranging trade arrangements with other countries, including the EU itself to whom we sell 45% of our exports. The EU currently has 53 free-trade deals with other nations and the UK would have to renegotiate at least this many. If large (especially financial services) firms see the UK as too isolated form the EU then they could move their UK operations. With this in mind, sizeable property investment would be compromised as inward investment reviews alternatives such as Frankfurt.
The case for out for the property market
The UK would be free to reinvent itself and possibly structure itself as an offshore financial centre and tax haven for high net worth individuals, thereby in the long term attracting inward investment. It would be able to shape its future drawing lessons from Norway, Switzerland, Singapore and the Channel Islands and create a hybrid of its own choosing. It could rewrite its own trade deals with important nations such as India, China and America. Global trade is now far more advanced and liberalised than it was in 1975 at the last referendum and so the need for a trade block is subdued.
The UK would have more control over employment and health and safety law which would be good for UK business thereby cutting red tape. Its labour markets are already among the rich world’s least regulated.
Britain would be free to cherry pick those immigrants that it most wants and needs which would mean a long term bounce back of net contributing immigration to the UK. Thus demand for housing, mostly rented, would be restored in the long term.
Right to rent legislation would have to be reviewed with more onerous visa checks for non-EU passport holders likely. Currently the legislation penalises landlords for failing to check the right to remain status of its tenants. At Hurford Salvi Carr, one third of our tenants are British, one third are European with the rest coming from the Rest of the World. These proportions are likely to change with an out vote.
We predict a high turnout at the polls compared with a General Election as the in/out referendum is a far bigger issue than a 5 year turn of governance. The outcome will impact the UK economy for decades to come and the UK faces the real possibility of living through the most high profile “divorce” case since Charles and Diana.
Brexit would surely slow down the housing market in the following months and years but is likely to recover in the long run depending on the UK’s ability to negotiate by itself and for itself but as John Maynard Keynes put it “in the long run we are all dead”.